The policy measures announced by the Reserve Bank of India (RBI) are along expected lines. While it has effected another rate hike to control persistent inflation, there is a clear shift in the growth-inflation balance. The likelihood of another rate hike in the December 2011 policy is low. The current rate hike could well be the last one, with the first rate cut likely in April 2012.
The moderation in RBI’s growth estimate is a bit of a negative. But this has largely been factored by the markets much ahead of the official admission. As the RBI’s and the government’s focus shift to growth, we believe there would be a gradual improvement. The emerging environment will be positive for the interest rate-sensitive businesses, which have withstood the uncertainties of high inflation and high interest rates. With increased visibility of a downward trend in interest rates, companies can go ahead with their pending capex plans. Besides, if inflation moderates from December, as expected, it would also release cost-side pressures.
The savings bank deregulation comes as a negative surprise initially, but its impact is more bank-specific. A lot depends on how customer behaviour would adjust to changes in the short-term deposits rates and whether RBI maintains a liquidity deficit at the system level consistently.
Two areas that have not received adequate attention this time are liquidity and exchange rate. Perhaps RBI would subsequently announce open market operations to ease the liquidity situation and bond yields, else the crowding out of private sector credit to accommodate government borrowing may become a real possibility. On the exchange rate front too, further liberalisation of foreign institutional investors’ participation in the bond market may be in the offing.
Motilal Oswal
CMD, Motilal Oswal Financial Services